Information of Prudential Relevance Pillar III 3Q 2017
1. Introduction... 3 2. Total eligible capital... 4 3. Capital requirements information... 6 4. Main risk weighted assets variations... 9 5. Leverage ratio... 11 2
1. Introduction BBVA Group s fully loaded CET 1 ratio stood at 11.20% at the end of September 2017, above the target of 11% and the fully loaded leverage ratio stood at 6.67% which is ahead those of its Peer Group. Pursuant to solvency regulation requirements, below is the prudential information as of September 30th, 2017, in accordance with the European Banking Authority s Guidelines on materiality, proprietary and confidentiality and on disclosure frequency under Articles 432(1), 432(2) and 433 of Regulation (EU) No 575/2013 published in December 2014, adopted by the Banco de España Executive Commission on February 12th, 2015, which specifies the prudential information to be reported within a year. In order for all European institutions to implement the Basel revision in such a way as to meet CRR requirements on this matter, on December 14, 2016 the European Banking Authority ( EBA ) published its final guidelines on regulatory disclosure ( Guidelines on Revised Pillar 3 Disclosures Requirements ). The implementation date for these guidelines is the close of the financial year 2017. However, it is recommended that Global Systemically Important Banks ( G- SIB ) should undertake a partial implementation at the close of the financial year 2016. Following this recommendation, BBVA Group, committed to transparency, has decided to partially implement the guidelines as of the close of the financial year 2016. 3
2. Total eligible capital The table below shows the amount of total eligible capital, net of deductions, for the different items making up the capital base as of September 30, 2017 and December 31, 2016, in accordance with the disclosure requirements for information relating to temporary capital set out by Implementing Regulation (EU) No. 1423/2013 of the Commission dated December 20, 2013: Table 1. Details of total eligible capital Eligible capital resources 09/30/17 12/31/16 a) Capital and share premium 27,259 27,210 b) Retained earnings 25,610 23,688 c) Other accumulated earnings (and reserves) (8,116) (5,500) d) Minority interests 5,437 6,969 e) Net attrib, profit and interim and final Group dividends 1,798 1,972 Ordinary Tier 1 Capital before other reglamentary adjustments 51,988 54,339 f) Additional value adjustments (334) (250) g) Intangible assets (6,788) (5,675) h) Deferred tax assets (913) (453) i) Fair value reserves related to gains or losses on cash flow hedges (33) - j) Expected losses in equity (20) (16) k) Profit or losses on liabilities measured at fair value - - l) Direct and indirect holdings of own instruments (297) (181) m) Securitizations tranches at 1250% (45) (62) n) Temporary CET1 adjustments (165) (331) o) Admisible CET1 deductions - - Total Common Equity Tier 1 regulatory adjustments (8,595) (6,969) Common Equity Tier 1 (CET1) 43,393 47,370 p) Equity instruments and share premium classified as liabilities 5,771 5,423 q) Items referred in Article 484 (4) of the CRR 142 691 r) Qualifying Tier 1 capital included in consolidated AT1 capital issued by subsidiaries and held by third parties 374 383 Additional Tier 1 before reglamentary adjustments 6,287 6,497 s) Temporary adjustments Tier 1 (1,697) (3,783) Total reglamentary adjustments of Additional Tier 1 (1,697) (3,783) Additional Tier 1 (AT1) 4,590 2,713 Tier 1 (Common Equity Tier 1+Additional Tier 1) 47,983 50,083 t) Equity instruments and share premium 1,764 2,357 u) Amount of the admissible items, pursuant to Article 484 - - v) Admissible shareholders' funds instruments included in consolidated Tier 2 6,874 5,915 issued by subsidiaries and held by third parties -Of which: instruments issued by subsidiaries subject to ex-subsidiary stage 142 350 w) Credit risk adjustments 598 538 Tier 2 before reglamentary adjustments 9,237 8,810 Tier 2 reglamentary adjustments - - Tier 2 9,237 8,810 Total Capital (Total capital = Tier 1 + Tier 2) 57,219 58,893 Total RWA's 365,314 388,951 CET 1 (phase-in) 11.88% 12.18% CET 1 (fully loaded) 11.20% 10.90% Tier 1 (phase-in) 13.13% 12.88% Tier 1 (fully loaded) 12.90% 12.46% Total Capital (phase-in) 15.66% 15.14% Total Capital (fully loaded) 15.35% 14.71% BBVA Group s fully loaded CET 1 ratio stood at 11.20% (11.88% in phase-in terms) at the end of September 2017, above the target of 11%. 4
This ratio has increased by 30 basis points from December 2016, due to recurrent generation of incomes, reduction in RWAs and different corporate operations that have had a combined impact of -8 basis points (acquisition of an additional 9.95% stake in Turkiye Garanti Bankasi, A.S. ( Garanti Bank ); the sale of 1.7% in China Citi Bank (CNBC); and the capital increase in BBVA Banco Francés by $400M with the goal of financing the organic growth of the Bank). During the second quarter of 2017, BBVA S.A. issued 500M in additional Tier 1 capital (contingent convertible), which contributed 13 basis points to the total capital ratio. In addition, BBVA S.A. has undertaken various subordinate capital issues worth a nominal amount of close to 1,500 throughout the year. Meanwhile, Garanti in Turkey issued $750M (in the second quarter). These transactions compute as Tier 2 capital, having a 50 basis points impact on the BBVA Group s total capital ratio. Furthermore, the last dividend-option program was completed in April, with holders of 83.28% of rights choosing to receive new BBVA shares, and an interim dividend of 0.09 per share was distributed for 2017, in line with the shareholders compensation policy announced in February. At the end of September 2017, the phase-in CET1 ratio was 11.88%, the Tier 1 ratio reached 13.13% and the Tier 2 ratio 2.53%, resulting in a total capital ratio of 15.66%. These levels are above the requirements established by the European Central Bank (ECB) in its SREP letter and the systemic buffers applicable to BBVA Group for 2017 (7.625% for the CET1 ratio and 11.125% for the total capital ratio in phase-in terms). Finally, it is worth mentioning that during the third quarter of 2017, BBVA S.A. issued 1,500M in non-preferred senior debt, which enables to reinforce the loss absorption capacity of the Group and consequently facilitating compliance with the Minimum Required Eligible Liabilities (MREL). 5
3. Capital requirements information The third part of the CRR sets out the capital requirements, in accordance with the Basel III framework, as well as techniques for calculating the different minimum regulatory capital ratios. The table below presents a breakdown of the RWA and the minimum capital requirements by risk type as of September 30, 2017 and December 31, 2016: Table 2: EU OV1- Capital requirements by Risk type RWA (1) Minimum Capital Requirements (2) (3) 09/30/17 12/31/16 (4) 09/30/17 Credit Risk (excluding CCR) 289,866 309,046 23,189 Of which the standardized approach (5) 203,124 215,908 16,250 Of which the foundation IRB (FIRB) approach - - - Of which the advanced IRB (AIRB) approach 83,682 89,589 6,695 Of which equity IRB under the simple risk-weighted approach or the IMA (6) 3,061 3,548 245 CCR 10,482 11,888 839 Of which mark to market 8,586 9,473 687 Of which original exposure - - - Of which the standardized approach - - - Of which the Internal model method (IMM) - - - Of which risk exposure amount for contributions to the default fund of a CCP 58 93 5 Of which CVA 1,838 2,321 147 Settlement Risk - - - Securitization exposures in the banking book (after the cap) 1,734 1,477 139 Of which IRB approach 791 332 63 Of which IRB supervisory formula approach (SFA) - - - Of which internal assessment approach (IAA) - - - Of which standardized approach 943 1,144 75 Market Risk 16,102 16,370 1,288 Of which the standardized approach (7) 8,906 7,112 712 Of which IMA 7,197 9,258 576 Operational Risk 33,081 34,323 2,646 Of which basic indicator approach 6,036 6,444 483 Of which standardized approach 9,888 10,781 791 Of which advanced measurement approach 17,157 17,098 1,373 Amounts below the thresholds for deduction (subject to 250% risk weight) 14,048 15,848 1,124 Floor Adjustment - - - TOTAL 365,314 388,951 29,225 (1) Risk-weighted assets according to the transitional period (phase-in). (2) Multiplied by 8% of RWAs. (3) Under CET 1 requirements (7.625%) after the supervisory evaluation process (SREP), the requirements amount to 27,855 million euros. Under total capital requirements (11.125%) the requirements amount to 40,641 million euros. (4) Shown for comparative purposes only and corresponds to proforma data as of December 2016. (5) Deferred tax assets arising from temporary differences, which are not deducted from own funds (subject to a risk weight of 250%) are excluded, in accordance with Article 48.4 CRR. This amount amounts to 6,212 and 7,653 at 30 September 2017 and 31 December 2016, respectively. (6) Significant investments in financial sector entities and insurers that are not deducted from own funds (subject to a risk weight of 250%) are excluded, in accordance with Article 48.4 CRR. This amount amounts to 7,837 and 8,195 as at 30 September 2017 and 31 December 2016, respectively. (7) Exchange rate risk calculated by standardized approach is included. Below, the total for capital requirements and RWAs are shown, broken down by type of Risk and exposure categories as of September 30, 2017 and December 31, 2016: 6
Table 3. Capital requirements by risk type and category of exposure Exposure categories and risk types Capital Requirements (*) Capital Requirements (*) Sep-17 Dec-16 Sep-17 Dec-16 Credit risk 17,020 18,239 212,753 227,987 Central governments or central banks 2,424 2,408 30,296 30,106 Regional governments or local authorities 81 79 1,010 989 Public sector entities 60 75 745 941 Multilateral Development Banks 4 3 47 33 International organizations - - - - Institutions 531 510 6,635 6,370 Corporates 7,157 8,301 89,461 103,761 Retail 3,146 3,266 39,328 40,821 Secured by mortgages on immovable property 1,601 1,702 20,012 21,276 Exposures in default 410 465 5,131 5,807 Items associated with particularly high risk 300 175 3,748 2,193 Covered bonds - - - - Short-term claims on institutions and corporate 5 7 59 87 Collective investments undertakings (CIU) 2 11 22 140 Other exposures 1,301 1,237 16,258 15,463 Securitized positions 75 92 943 1,144 Securitized positions 75 92 943 1,144 TOTAL CREDIT RISK BY THE STANDARDIZED APPROACH 17,096 18,330 213,696 229,131 Credit risk 6,655 7,179 83,190 89,741 Central governments or central banks 94 44 1,179 552 Institutions 477 489 5,962 6,114 Corporates 4,464 4,879 55,795 60,983 Of which: SME 770 965 9,624 12,061 Of which: Specialised lending 703 777 8,783 9,710 Of which: Other 2,991 3,137 37,388 39,212 Retail 1,620 1,767 20,253 22,091 Of which: Secured by real estate collateral, SME - - - - Of which: Secured by real estate collateral, non-sme 683 855 8,542 10,690 Of which: Qualifying revolving retail 592 590 7,403 7,376 Of which: Other retail assets, SME 113 120 1,408 1,503 Of which: Other retail assets, non- SME 232 202 2,899 2,523 Equity 1,325 1,331 16,558 16,639 By method: Of which: Simple Method 780 863 9,756 10,782 Of which: PD/LGD Method 453 392 5,661 4,896 Of which: Internal Models 91 77 1,142 961 By nature: Of which: Exchange-traded equity instruments 421 528 5,257 6,598 RWA(1) RWA(1) Of which: Non-trading equity instruments in sufficiently diversified portfolios 904 803 11,301 10,042 Securitized positions 63 27 791 332 Securitized positions 63 27 791 332 TOTAL CREDIT RISK BY THE ADVANCED MEASUREMENT APPROACH 8,043 8,537 100,539 106,713 TOTAL ECC'S DEFAULT GUARANTEE FUND CONTRIBUTION 5 7 58 93 TOTAL CREDIT RISK 25,143 26,875 314,293 335,937 SETTLEMENT RISK - 0-0 Standardized: 211 246 2,640 3,071 Of which: Price Risk from fixed-income positions 183 211 2,285 2,638 Of which: Price risk for securitizations 2 1 29 17 Of which: Correlation price risk 12 5 149 63 Of which: Price Risk from equity portfolios 10 19 130 234 Of which: Commodities risk 4 9 47 118 Advanced: Market Risk 576 741 7,197 9,258 TOTAL TRADING-BOOK ACTIVITY RISK 787 986 9,837 12,329 EXCHANGE RATE RISK (STANDARDIZED APPROACH) 501 323 6,266 4,041 RISK DUE TO CVA ADJUSTMENT 147 186 1,838 2,321 OPERATIONAL RISK 2,646 2,746 33,081 34,323 CAPITAL REQUIREMENTS 29,225 31,116 365,314 388,951 (1) Corresponding to phase-in Risk Weighted Assets (*) Calculated as 8% RWAs The chart below shows the total Risk-weighted assets broken down by type of Risk as of September 30, 2017 and December 31, 2016: 7
Chart 1. Breakdown of RWA s by Risk Type 8
4. Main risk weighted assets variations The following tables show RWA movements for credit Risk by standardized model and advanced model (excluding counterparty risk, equity and securitization positions) between September 30, 2017 and December 31, 2016: Table 4: Variations in the period in terms of RWA s for the Credit Risk standardized measurement approach RWA amounts Capital Requirements RWA s December 2016 223,561 17,885 Asset size 2,779 222 Asset quality 166 13 Model updates - - Methodology and policy - - Acquisitions and disposals - - Foreign exchange movements (17,171) (1,374) Other - - RWA s September 2017 209,336 16,747 Table 5. EU CR8 Variations in the period in terms of RWA s for the Credit Risk advanced measurement approach RWA amounts Capital Requirements RWA s December 2016 84,694 6,776 Asset size (3,221) (258) Asset quality (1,492) (119) Model updates - - Methodology and policy - - Acquisitions and disposals (1,243) (99) Foreign exchange movements (928) (74) Other 211 17 RWA s September 2017 78,021 6,242 As of September 30, 2017, RWAs decline relative to December 2016, largely explained by depreciation of currencies against the euro (especially the Turkish lira and the U.S. dollar) and an improvement in the risk profile of the Group s portfolio, particularly the Spanish portfolio. In this regard, it is worth noting that 3,000M synthetic securitization was agreed on June 2, which covers potential losses on a portfolio of around 15,000 loans to Spanish SMEs. This was arranged through a mezzanine guarantee facility provided by the European Investment Fund (EIF, a subsidiary of the supranational European Investment Bank). By means of this operation, consumption by the underlying loans (-1,442M in RWAs) is stopped, turning to consume by securitization (+759M in RWAs), enabling the Group to free up 683M in RWAs with a corresponding positive impact on the capital base. The table below shows the variations for the period between September 30, 2017 and June 30, 2017 in terms of RWA by market risk for the advanced measurement: 9
Table 6. EU MR2 B- RWA flow statement of market risk exposures under internal model approach RWA flow statements of market risk exposure under IMA VaR Stressed Total Capital IRC CRM Other Total RWAs VaR Requirements RWA s at year end of previous statement period (*) 2,394 4,039 1,502 - - 7,935 635 Movement in risk levels (301) (58) (155) - - (514) (41) Model updates/changes - - - - - - - Methodology and policy - - - - - - - Acquisitions and disposals - - - - - - - Foreign Exchange movements (39) (61) (30) - - (130) (10) Other - - (95) - - (95) (8) RWA s September 2017 2,055 3,920 1,222 - - 7,197 576 (*) Previous report period refers to last quarter - June 2017 During the third quarter of 2017, there was a reduction in the RWAs for the market risk, with the advanced measurement approach, mainly due to a decrease in the position in sovereign debt as well as the exit of two scenarios of the historical distribution of risk factors for the calculation of VaR. 10
5. Leverage ratio The table below shows a breakdown of the items making up the leverage ratio as of September 30, 2017 and December 31, 2016: Table 7. Elements Comprising the Leverage Ratio Summary table of accounting assets and leverage ratio 09/30/17 09/30/17 12/31/16 12/31/16 exposure conciliation Phase-In Fully Loaded Phase-In Fully Loaded a) b) c) d) e) Total assets as per published financial statements Adjustment for entities which are consolidated for accounting purposes but are Adjustments for derivative financial instruments Adjustments for securities financing transactions "SFTs" Adjustment for off-balance sheet items (ie conversion to credit equivalent amounts of off-balance sheet exposures) (1) 690,797 (17,878) (17,860) (966) 62,773 690,797 (17,878) (17,860) (966) 62,773 731,856 (17,272) (18,788) (4,525) 66,397 731,856 (17,272) (18,788) (4,525) 66,397 f) (Adjustment for intragroup exposures excluded from the leverage ratio exposure measure in accordance with Article 429 (7) of Regulation (EU) No 575/2013) - - - - g) Other adjustments (9,899) (10,336) (10,451) (10,961) Total leverage ratio exposure 706,968 706,531 747,216 746,706 h) Tier 1 47,983 47,138 50,083 48,459 Total leverage ratio exposures 706,968 706,531 747,216 746,706 Leverage ratio 6.79% 6.67% 6.70% 6.49% (1) This corresponds to off-balance sheet exposure after application of the conversion factors obtained in accordance with Article 429, paragraph 10 of the CRR. The leverage ratio has slightly increase (9 basis points in phase-in terms) compared to December 2016, produced by the reduction in Tier 1 capital ratio, which is explained by the impact of the currency (see section 2 of this report), but compensated by the decrease in the adjusted exposure derived from the movement of the balance sheet masses according to the business activity, as well as the impact of the depreciation of the Turkish lira and the U.S. dollar. The leverage ratio as is up to 6.79% (phase-in), well above the required minimum of 3%. This level of leverage reflects the nature of the business model geared to the retail sector. 11